Friday, March 18, 2005

Slowdown expected after years of growth



The U.S. housing market appears headed for a slowdown after four years of spectacular growth that has raised widespread fears of a real estate "bubble."

Because rising short-term interest rates and worries about inflation are driving up the price of home mortgages nationwide, home sales are expected to slow, and prices in some markets could even fall.

Optimists expect the growth in sales to level off from phenomenal recent peaks. Pessimists warn that many metropolitan markets could see bursts of housing "bubbles" -- markets in which speculative investment drove prices higher than usual demand can sustain.

Although mortgage rates remain relatively low, they are rising, which is fueling the debate.

Mortgage giant Freddie Mac, in its weekly survey of mortgage rates reported yesterday that rates on 30-year, fixed-rate mortgages averaged 5.95 percent this week, up from 5.85 percent last week and the highest since the week that ended Aug. 5, when rates averaged 5.99 percent. Rates on 15-year, fixed-rate mortgages, a popular option for refinancing, rose to 5.47 percent this week, up from 5.38 percent last week.

The one-year adjustable-rate mortgage, popular with investors who purchase homes to resell quickly, is about 4.24 percent, up from 3.20 percent the year before.

Most experts agree that a slowdown is overdue. The Federal Reserve has raised short-term lending rates by 1.5 percentage points in six quarter-point moves since last June, but long-term rates were slow to follow until recently.

Federal Reserve Chairman Alan Greenspan has made it clear that more short-term rate increases are coming, and higher mortgage rates are expected to follow.

Freddie Mac, one of two federal housing-finance agencies, predicts a 30-year fixed-rate mortgage of 6.25 percent by year's end.

That should curb the rise in home prices, which surged a spectacular 11.2 percent last year, the fastest rate since 1979, according to the Office of Federal Housing Enterprise Oversight, which regulates Freddie Mac and Fannie Mae, the nation's largest supplier of home mortgage funds.

Nationally, home prices have risen 8.4 percent annually over the past five years.

Economists in the optimist camp think that a growing economy, and an influx of new buyers as the "echo boom" generation enters the market, will keep home prices rising, albeit more slowly. They expect mortgages to remain affordable.

"We are expecting 6.5 percent by midyear, which is low in a historical context," said Celia Chen, the director of housing economics for Economy.Com, a business consultancy.

Other economists take a more dour view but stop short of predicting havoc.

"I do think it is going to weaken over the next year as interest rates go up. Owning is going to look more expensive relative to renting," predicted Jan Hatzius, a senior economist at Goldman Sachs investment bank in New York.

Pessimists think that the nation's hottest real-estate markets are in a bubble driven by unbridled speculative investment. Anecdotal evidence abounds. Outside Washington, young professionals camp out overnight for a chance to bid on new homes. In South Florida, new homes and condos can sell two or three times before they're even built.

In late February, a National Association of Realtors report said that 23 percent of homes purchased last year were bought as investments or second homes. The report suggested that many people are buying homes for quick turnarounds, much as they'd plunk money into rising stocks.

On March 7, David Berson, chief economist for Fannie Mae, observed in his weekly commentary that investor ownership of housing hasn't been this high since the late 1980s, which saw a crash in housing prices.

Berson suggested it could happen again because "the risk of regional home price declines is higher" as so many purchases are by speculators rather than residents.


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